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LogicaCMG shareholders on Monday broadly welcomed the company’s £631m deal to buy French rival Unilog, despite the fact that the transaction is to be partly financed through a deeply-discounted rights issue.
The Anglo-Dutch IT services company is offering two new shares for every existing one, at the price of 107p per share, a 38 per cent discount.
Nevertheless, LogicaCMG shares on Monday recouped much of their losses from Friday, when news of the deal first emerged.
“We are supportive of the deal, which is strategically important for LogicaCMG,” said Hugh Sargent fund manager at Société Générale Asset Management, which has a holding in the company. “This moves them up the rankings as a pan-European IT services company, and will move them into profit in France and Germany”
Investors have long been asking LogicaCMG to take action in France and Germany.
Following its creation in the 2002 merger between Logica of the UK and Netherlands-based CMG, the company had a strong position in those two countries, and vestigial operations in France and Germany that dragged down the rest of the group’s operations.
One option would have been to pull out of the regions entirely. Xansa, one of LogicaCMG’s UK peers did just that in 2004, opting to focus only on its key UK operations.
The strategy worked well for Xansa, but Martin Read, chief executive of LogicaCMG, was too ambitious for this kind of retreat. He has for some years reiterated plans to double the size of the business and to become one of Europe’s ten largest IT services companies.
The only option, therefore, was to find an acquisition. Mr Read approached Gérard Philippot, president of Unilog, in April this year and by July had agreed in principle to a deal.
For Unilog the deal looked attractive, as the French company was feeling pressure from clients to be more international.
“The market is changing too fast. Big clients had started asking us for more globalisation, more offshoring services. We were afraid that within two to three years we would be unable to answer those demands,” said Didier Hermann, executive vice president of Unilog, who will take on the running of the French, German and Swiss businesses for the combined group.
Unilog had looked for its own acquisitions abroad but had failed to find suitable candidates. The impending retirement of Mr Philippot was also adding to the group’s vulnerability.
LogicaCMG is buying 32.3 per cent of Unilog from management for €255.4m in cash and 19.57m new shares. LogicaCMG will buy the remaining 67.7 per cent through a public tender offer, at €73 per share.
“It isn’t cheap, but it is fair - it reflects the quality of the Unilog business, which has been one of the most consistent performers in the French IT market,” said David Brockton, analyst at Investec.
Unilog does more than €525m of business in France - around three times as much as LogicaCMG - and has operating margins of around 10 per cent while other IT services companies struggle to break even.
An added bonus is that Unilog last year managed to return its lossmaking German business to profit. Investors hope they will be able to apply the same magic to the LogicaCMG operations in the country.
LogicaCMG says it is expecting some £19m in synergies from the deal in 2007, with about half of this amount achievable in 2006.
Few investors are concerned about integration risks. The relatively smooth integration of the Logica and CMG businesses over the last three years has given the management a great deal of credibility, and left investors confident that they can deliver what they promise.